Evolution of payment possibilities: Part 2
* The article was initially published on our blog.
For thousands of years, grains and shell money were the only payment option for our ancestors who refused to trade the product of their hard work for gratitude and obligation. Luckily, these days are over and today we enjoy the speed of payments innovation that is an important part of our life.
Obviously, it was a long way to go with plenty of milestones to cover. Modern payments methods include online banking, credit and debit card, charge card or e-wallet, but take a step back and look at how it all began.
The Rise of Money Transfer (Western Union)
Until the mid of 19th century, the development of payments methods was pretty lame as paper money, coins and cheques only ensure the circulation of goods and services among banks with no possibility of remote trading.
However, in 1856 Western Union was born out of two telegraph companies that combined their effort to kick off the first money transfer service, based on extensive telegraph network. Banks used telegraphic transfer as a cable message to one another in order to approve the transfer of money. As the telephone was gradually replacing the telegraph, Western Union settled a patent lawsuit with Bell Telephone Company and become the global provider of money transfers.
By 1900, Western Union operated a million miles of telegraph lines and two international undersea cables to Europe, North Africa, and Asia. This way Western Union contributed to the rapid development of the international trade and money transfer between two or more counties.
Introduction of Bank Cards
A bank card is typically a plastic card issued by a bank to its clients that performs one or several services that relate to giving the client access to a bank account in case it is out of business hours.
The idea of nicknamed cards that gave their holders payment or other service privileges occurred in the US in the early 1900s. It was introduced by oil companies and hotel chains, which encourage clients’ loyalty giving them access to free deferred payments options that were written off to a card.
In 1946, the Brooklyn banker John Biggins came up with Charge-It, the fist analog of modern banking card but made from gold or silver. The bill was forwarded to Biggins’ bank when a cardholder used it for a purchase. The bank reimbursed the merchant and obtained payment from the customer. Purchases could only be made locally, and Charge-It cardholders had to have an account at Biggins’ bank.
A couple of years later, American Express introduced a paper charge card that performed similar functionality. The card was launched with an annual fee of $6 to be seen as a premium product. The first cards were encrusted with the account number and cardmember’s name. In 1959, American Express began issuing the industry-first plastic cards.
However, as charge cards can only be used by the client who has money for instant shopping, the bankers have been missing out many opportunities that were unleased with the emergence of credit cards that became a breakthrough to the banking services industry.
In 1966, Barclays introduced the first UK credit card, which as sed on Bank America card that had been launched a few years earlier in the US. At present, credit cards are the leading payment method in both the UK and US in term of value, accounting for 52% of GDP in 2018. It also became a primary tool for online payment that we will discuss further.
Online payment
People spend billions each year shopping online, but few know it was a grandmother from Gateshead who pioneered it from her living room. Grandmother Jane Snowball, 72, sat down in an armchair in her home in May 1984, picked up a television remote control and used it to order the groceries from her local supermarket.
With her remote control, she used a piece of computer technology called Videotex. It sent the order down her phone line to the local Tesco — the goods were then packaged and delivered to her door. Mrs. Snowball never saw a computer — her television linked her to the shop. It was years before the world wide web came into being.
However, the main turning point in online payment happened in 1989 when Tim Berners-Lee presented the solution of making information easier to publish and access on the internet by using the so-called “sites” or “pages”.
Along with web applications development, the pioneer online payment services started to operate in the first half of the 90s.
In 1994 Stanford Federal Credit Union established the first financial institution, which offered online internet banking services to all its members. However, first online payment systems weren’t user-friendly at all and required specialized knowledge of encryption or data transfer protocol. What is more, the systems weren’t adapted to constantly changing users’ number and their transactions.
The accessibility of online payments was broadened by Visa and Mastercard, well-known payments magnates. In 1996, they built the SET protocol to streamline security and integrity of electronic payments done using credit cards in a scenario.
American PayPal, responsible for the majority of transactions on the internet, was established in 1998 as a mobile payment company with wireless transactions on Palm Pilots. It soon switched focus to online payments when it found a strong customer base on eBay.
As of 2019, PayPal operates in 202 markets and has 286 million active, registered accounts. Through PayPal, users can send or receive payments for online auctions on websites like eBay, which is the US-based multinational e-commerce corporation.
Along with the development of online payment, pioneer mobile payment services started to operate in the 2010s.
Mobile Payment and Social Networks
Hectic lifestyle and on-demand consumption change shoppers’ behavior who are more and more numerous to purchase online through a mobile device than a computer. Technology innovation introduces many payment methods inclosing e-wallets, mobile wallets, peer-to-peer payments and many more.
After adapting to the internet revolution and e-commerce, global merchants now consider mobile-commerce competitive challenges placed by tech giants like Samsung, Apple, Amazon, and Google who launch their own solution.
However, turning to the begging of the mobile payment era we won’t see their vocal names. In fact, Coca-Cola receives credit for offering the first mobile payment transaction in 1997. The beverage retailer created special vending machines that enabled consumers to pay for their drinks by sending text messages from mobile devices.
After that Starbucks started to accept mobile payments as an opportunity to reach those who don’t always carry cash.
Since this time, mobile payments have skyrocketed in popularity. Now, more people than ever before are paying on the go, and more merchants can accept payments anywhere, without being tied down to a cash register.
In China, for example, social-media-first platform WeChat has grown into a multipurpose network that among other features support mobile payments, so that you chat with your friends, order takeout and pay medical bills — all by the means of one app.
Summing up
As you can see, the payments landscape has overcome dramatic changes over the past few decades. From paper charge cards to plastic chip and pin credit cards to mobile wallets. It is driven by technology innovation and obviously, its future depends entirely on the development of FinTech, internet infrastructure and consumer preferences that are ever-changing.
Today consumers more willingly hand over their money to tech giants like Google, Amazon, Alibaba, and Apple. They risk their privacy in return for fast and pay-as-you-go services.
What changes will see the payments industry in the next couple of years only time can tell but FinTech is already shaping it with cost-saving and frictionless offerings.
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